Dean Foods cancels more than 100 milk contracts in 8 states

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Dive Brief:

Dean Foods has informed more than 100 dairy operations across eight states that their contracts with the company will be terminated at the end of May. According to Farm and Dairy, Dean's letter to the contracted operations blamed an oversupply of raw milk, a decrease in fluid milk consumption and Walmart's new 250,000-square-foot milk processing facility in Indiana, which will result in 90 million to 100 million fewer gallons being supplied by the dairy giant.

The Dallas-based Dean said it is offering to help affected dairies find new milk buyers. Some suppliers to the company's TruMoo and DairyPure labels said the timing for the decision was bad as the industry is already feeling the pinch from declining milk prices due to overproduction, along with lower U.S. consumption. Without new processors for their milk supply, some operations may have to shut down, according to Dairy Reporter.

The Center for Dairy Excellence in Pennsylvania, where 42 operations were sent the contract cancellation letter, said it was making mental health and stress management resources available. "It’s a very difficult situation and absolutely the worst time for this to happen," Jayne Sebright, the center's executive director, told Farm and Dairy. Dean noted it would still be purchasing milk from about 12,000 dairy operations across the country.

Dive Insight:

Dean Foods said it had tried to avoid canceling the contracts, but there was no other option, according to the Dairy Reporter. While a difficult decision, the struggling company is wise to curtail how much milk it is buying to bring demand for the company's products more in line with consumer consumption. Last month, Ralph Scozzafava, Dean's CEO, said the company planned to undertake major changes in 2018 to "reduce our cost structure to match our smart volume today."

Dean has been hit by a plethora of challenges that have hurt the company. The new Walmart milk-processing facility in Fort Wayne, Indiana, is scheduled to go online this spring and will cause Dean to lose a chunk of its business.

Like most dairy producers, Dean has been hurt by declines in fluid milk sales, with its most recent earnings report showing a 6% drop in total volume for the fourth quarter of 2017. The company said that, since 2010, Americans have been drinking approximately three fewer gallons per person annually. Sales in the dairy-based milk category have dropped about 15% since 2012, falling to an estimated $16.12 billion in 2017. Meanwhile, non-dairy milk sales in the U.S. have increased 61% during the past five years to more than $2 billion annually.

To help counter these trends, some companies are innovating with value-added products that could resonate with consumers. Some of the latest market entries are carbonated, or "fizzy," milk products, which could build off the current sparkling water trend, grass-fed yogurts and flavored milks. These new milk flavors are said to have a longer shelf life than regular milk — enabling them to better compete with plant-based products — along with interesting flavors, which appeal to millennials and more adventurous beverage consumers.

The ongoing challenges have forced others in the dairy industry to overhaul their business models. Elmhurst Dairy, a family-owned operation in New York, switched from traditional milk to an entirely plant-based portfolio in 2017. And Danone managed to combine dairy and non-dairy products into a successful portfolio blend following its purchase last year of WhiteWave Foods.

Few dairy operations are likely to take such a dramatic step as Elmhurst, and most are small compared to Danone. However, it's likely that changing things may be required during these tough times.

Dean bought a minority stake in Good Karma Foods, a maker of non-dairy milk and yogurt, in May 2017, and, in June of last year, it purchased Uncle Matt's Organic, which manufactures probiotic-infused juices and fruit-infused waters. However, those two investments haven't yet made much of an impact. As it works to overhaul its own internal operations, Dean may have to look for a major acquisition that can meaningfully change the company and better position it to respond to consumers who increasingly are souring on traditional milk.

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